Did California’s $25B Budget Deficit Just Tank Gavin Newsom’s Presidential Dreams?

Days after a less-than-disastrous midterm, an unpopular President Joe Biden announced that he intends to run for reelection in 2024. Democrats face a weak and aged bench — though one Democrat who might play Ted Kennedy to Biden’s Jimmy Carter, California Gov. Gavin Newsom, just saw his narrow path to the White House become even more difficult to navigate as California’s legislative analyst announced that the Golden State was facing a $25 billion budget deficit.

Now Newsom will be forced to stay close to California and deal with a budget mess largely of his own making.

How did California, the progressive left’s shining North Star, experience such a rapid budgetary collapse when just a few months ago liberals were crowing about the state’s robust finances — typically conflating this year’s $100 billion surplus with the health of California’s economy?

There are three main causes for California’s fiscal distress.

Reliant on Taxing Big Earners

First, California has a massive overreliance on high-income earners and corporate startups. For more than a decade, California has had America’s highest marginal income tax rate, 13.3 percent. This means that when Silicon Valley does well, California’s revenue surges, raking in billions of dollars from the value of stock options, initial public offerings, and capital gains. But the reverse is true as well — when California’s economy slows, even slightly, revenue plummets. Thus, with Lyft, Meta, Twitter, and others laying off thousands, California’s tax revenue suffers. It all makes for a very volatile revenue stream.

The problem with the big ups and downs in revenue is that Democrats in Sacramento rapidly ramp up spending in the good times, and then, loath to cut spending, rack up deficits in the slow times.

Massive Regulatory Burden

Second, California’s high taxes (only New York, Connecticut, Hawaii, and Vermont have a greater state and local tax burden), heavy regulatory burden (second-worst in the nation), and bad lawsuit climate (third-worst) make the state hard on business, especially on entrepreneurs who can’t absorb the increasingly high costs of regulatory compliance. Add to that the state’s high cost of living (the third-highest behind Hawaii and Massachusetts), rampant homelessness, the highest poverty rate in the nation since 2009 (when accounting for the cost of living), and the highest electricity prices in the continental U.S., and California becomes even less attractive. In addition, California, as with other blue states and cities, responded to Covid-19 by trying to emulate China — opting for extensive shutdowns of businesses and schools.

If all those negatives aren’t difficult enough to deal with, the state’s aggressive cancel culture has added a layer of repression, forcing people with unpopular opinions to be quiet or risk harassment. As a result, many just decide to move out, taking their taxable income and businesses with them.

Increased Medicaid Costs

Third, California has gone all-in on Medicaid expansion (called Medi-Cal). In 2005, my first year on the Budget Committee and the Revenue and Taxation Committee in the California State Assembly, Medi-Cal absorbed 14 percent of

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